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October 21, 2010
Why No Severance Package for Laid-Off Worker?

A New Jersey consultant’s employer offered him and his colleagues “displacement benefits” when it sold the company they worked for—so long as they weren’t hired by the buyer. He and some of his co-workers were hired by the buyer—but for only 10 hours. Denied benefits, he sued.

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What happened. “Hughes” had worked for Buck Consultants for “many years,” according to the opinion in this case, when its owner, Mellon Financial Corporation, decided to sell the consultancy to Affiliated Computer Systems. The sale closed at midnight on May 25, 2005, with the buyer having signed an agreement to employ all 3,700 Buck employees. But Hughes and 99 others were informed at 10 a.m. on May 26 that they no longer had jobs.

When Hughes applied for displacement benefits under the program Mellon had established, the plan administrator took what’s called a “snap shot” approach, basing denial on the fact that the buyer had promised to employ all Buck workers. Technically, then, Hughes had a job when the sale closed, so he was not entitled to benefits. He appealed that decision to the plan manager but was again denied.

So Hughes took Mellon to federal district court, charging violation of his rights under the Employee Retirement Income Security Act (ERISA). A judge there ruled in Hughes’s favor, but Mellon appealed to the 3rd Circuit, which covers Delaware, New Jersey, and Pennsylvania.

What the court said. Judges carefully reviewed the plan documents of the displacement program, concluding that they contained a connotation that Buck employees would be employed after the sale for some period of time—not a mere 10 hours. They found the administrator’s reliance on the buyer’s promise of employment misguided, writing, “Crediting such empty promises is entirely unreasonable in light of the purpose of the Displacement Program.”

They were also struck by records showing that Buck top managers had met well before the sale of their company and decided which 100 consultants, including Hughes, they would let go. That made Hughes’s post-closing “job” look even more illusory. So judges affirmed the district court’s ruling in his favor, and Mellon will have to pay him his severance benefits. Howley v. Mellon Financial Corp., U.S. Court of Appeals for the 3rd Circuit, No. 08-1748 (2010).

Point to remember: Judges were also influenced by what they saw as a potential conflict of interest: Mellon’s benefits program was both administered by and paid for by the same managers. That is a common arrangement among insurance carriers, but courts increasingly find that it can lead to abuses in claims decisions.

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